tv [untitled] October 5, 2011 5:30pm-6:00pm EDT
alone and welcome to cross talk i'm peter lavelle days of rage is the global economy on the brink of a double dip recession if so why can't the rich west find the right mix of fiscal and monetary policies to jumpstart the global economy while generating jobs at home and where's the political will in the us and the euro zone to lead the world out of crisis. we can. start. to cross talk the global economic outlook i'm joined by new york he is a distinguished research professor in senior canada research chair at york university also in new york we have larry mcdonald he's a senior director at new edge and the bestselling author of a colossal failure of common sense the inside story of the collapse of lehman brothers and in washington we cross to dean baker he is co-director of the center for economic and policy research all right gentlemen this is crosstalk that means i want you to jump in i
very much encourage it leo if i can go to you first in new york are we headed for a double dip recession and is that the united states in the euro zone that's leading it. well we may be whether it happens this quarter or next quarter you know we're in for a very long period of capitalist nation since we don't have the credit fueled consumerism. consumption going especially in the states and imports of europe you know the picture doesn't look quite as bad in the united states as it does in europe at the moment. perhaps because the asperity isn't quite as heavy auto sales this month that actually increased and warren buffett said over the weekend that he thought that the economy was humming along the constructions that i mean a lot i think in the longer term well i mean there's the job generation which is the job generation i mean it's very interesting to look at these numbers and stats
but people are out of work and that's something that is not happening generating jobs dean if i can go to you i mean you can look at two consecutive quarters of negative growth and that's a double dip ok well lisa recession ok but we're not getting any job generation so we're do you see this going and are we going into a double dip and how deep will it be no no we are going to be able to have and i think it's really been unfortunate there's been so much focus in the media on that because the basic story hears at least in the united states we're looking at a prolonged period of very very weak growth and you know baseline we're looking at and there's not even that much difference in the range of forecasts and somewhere between two and three percent growth and we need to add a half percent just to keep pace with the growth of the labor force so that means if we're at two percent we're going to see the unemployment rate rising rather than falling given the severity of the downturn we should be seeing five six seven percent growth that's what you saw coming out of the recessions in eighty one eighty two and seventy four seventy five so that's what should have us concerned what are we going to double dip absent a collapse of the euro which is a real possibility again incompetence of the european central bank and we'll talk
about that a little bit later ok all right larry if i can go to you how do you see this is going into a double dip you're going to talk about the political will on both sides of the atlantic in a second here but i do when you look at the economy in the u.s. and globally where's it going. well unfortunately just like in two thousand and eight just before the failure of lehman brothers about eighty percent of global academics and economists have been dead wrong about this soft patch it's been much more severe than people thought but what's more disturbing is credit default swaps on commodity producing countries have been blowing out the last month and that hasn't happened since oh wait so in other words let's say countries like south africa countries that produce peru chile countries that produce commodities there are pulp protection on those countries is blowing that tells me this is much more severe than people think ok leo what's going on with operation twist i thought
mr bernanke he had you know he had some extra tools of his toolkit there but it has no impact whatsoever or maybe i'm wrong because it seems like the economy is on a downslide it's just a question of who might be green. well or how much worse would it be were he not attempting to do that i mean he's in the situation of interest rates already being and zero days trying to induce a longer term investment in a situation where corporations big corporations are sitting on a lot of cash in the investing and those that need cash the banks are lending to so i think we're all in agreement with you know this is going to be a recession or not that we're in for a very long period of stagnation and the only thing that's going to get western economies other this is the exact opposite of what they're doing especially in europe but also in the united states and that's the opposite of the spirit of it would be direct fiscal spending and i must say i think more than that i think it
would take direct government employment the kind of thing that was done with the w.p.a. and other programs during the depression here in the united states not that it by itself so all got a crisis of capitalism but it certainly played a role in the mid one nine hundred thirty s. until there was another dip in i think thirty seven so you know it's going to take that and the political forces to force that certainly in this country in the most important state overall in terms of global capitalism don't seem to be there at the moment the what do you think about that that everything everything is being done whereas i mean everyone talks about austerity but do we really need a fiscal injection here huge fiscal injection when you think about that. well that's exactly right i mean you know you sort of scratching your head going what on earth are these people are thinking when they're pushing for scaredy you know it's you know there's like no story you could tell i'm staying this is an economist
there's no economic story that i can think of i mean if they had one i'd be happy to look at it and try and figure out if it made sense or not but i don't even see one so it's not even like a debatable point they're saying oh we have a patient here but i mean it's not a story that it's not a debatable point leg if it's not if you paid people point then why isn't it happening i mean i think we all agree you know you look at it well i think it's really not it's happening anyhow because you know the people of money and power are doing just fine where are you going to jump in. gentlemen you're missing a huge point first of all fiscal stimulus never genet generated in any meaningful economic recovery you have to understand something in two thousand and seven i wrote about this in my book a colossal failure of common sense in two thousand and seven we had four trillion dollars of stimulus that came through securitization through all kinds of investment banking deals and wall street securitized mortgage products four trillion this year we're on pace for a total d. deals and from wall street and global banks is globally of
a little bit less than seven hundred billion so we're that's the problem is the private sector is him strong by regulation globally but hamstrung by this recovery in other words the banks are leveraging and that private sector is being him strong and that's not injecting capital around the world in the united states in two thousand and seven we have this year you're going to shadow banks mortgage brokers do you want to jump in they're going to have a fiscal stimulus if you think about this and i say that's the argument for fiscal stimulus the private sector is hamstrung because of a collapse of the housing bubble so that's right that's exactly the point the private sector is not going to do it that you know i was going to step in and build the demand until the private sector sees that it's worth its well to invest again do you want to jump in there. well immediately of those results too much rick. it's certainly not homes have strong by too much regulation all of this talk about regulation since the crisis virtually none of it has kicked in in any serious way
either internationally or in most countries domestically you know and i'm not even sure if fiscal stimulus is enough if that's understood simply as. running a deficit you know i think not this crisis is so serious for the reasons that that larry just identified in terms of the extent to which private credit has been restricted there is no way that this is going to turn around without direct government employment and when you say why aren't they doing it because it's not a technocrat a question everybody thinks it's about what advice economists give governments it's about what are the political forces in the country n.d.p. to labor take over the last thirty years both in the united states and in europe is the fundamental reason why there isn't the pressure the force is this ok dean is it all about politics and it's just politics not economics. oh yeah i mean i'd say that's absolutely right i mean if if the situation were reversed if it were the case that corporate profits were through the floor that the financial sector was
you know just about to go out of business you would see serious action from the government which of course we did in the fall of our way when the banks were about to go out of business they jumped to an act very very quickly and through literally trillions of dollars of below market loans at the financial sector but as it stands now the financial sector is back on its feet many of them are as profitable as they were before the downturn business as a whole is highly profitable it's only you know it typical workers that are suffering and you know they're supposed to talk it out larry then so it's really just about politics in the early in the election cycle because you know mr obama has been so timid about pushing more fiscal stimulus and you know he wants to cut it go go go down the austerity path we will talk about europe in the second half of the program here i mean it's really a political issue the republicans will let it happen it has his way and he's got it face mazing challenge because it will be higher than ten percent unemployment by the time he gets to election time when you think about that scenario. well i've
been i've been tweeting about this point my twitter handle is at convert poland and the bottom line is wall street banks are not not more profitable than ever we're hearing that all over this all over the world but this occupy wall street movement that's so not true you look at the bank earnings this quarter many of the biggest banks were poor losses deutsche bank just this morning reported a warning so you're seeing banks all across the world are struggling now granted two years ago a year and a half in two thousand and nine they were reporting record profits but in terms of wall street being a whole host of profits are back that's just not true but you have to understand one thing burn these numbers in your memory bank ok say save the amount ministration creates a fifty billion dollar highway project over ten years that will generate certain amount of jobs in the united states in two thousand and seven i talked about this in a book new century. and lehman were doing fifty five billion a month of mortgage issuance that money was going right into the u.s.
economy that's a massive stimulus actually so some money was not every day and you know it was written on paper back and forth. but that was not a job creation when someone you guys know someone who was actually not that into you know surely that's really not true that we don't have to not know what i mean they are second don't tell me it's not true oh my god he was just going you create jobs when you build a house you create jobs and people spend it on consumption items a vast majority and we have the data it was not we didn't see that big construction goob we didn't see that big of a consumption boom we don't have to replace that much money would be replacing the amounts we lost in fiscal stimulus. the one thing i think i would appreciate a little just a real quick one of the really quick one of the reasons for this long step one of the reasons for the depth of the stagnation and the length of it that we're facing is that the credit fuel consumption that has been going on until two thousand and
seven for decades given that leaders incomes were cut ok we'll let me jump in right here gentlemen we're going to short break and that is your brain looking at this in your discussion on the state of the economy state are. still. even the books of this plan the sacred. magic is the essence of life. whether it is a buddhist prayer. for a shamanistic which. crossroads of two religion's.
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and what's going on in the crucifixion of greece if pretty good politically if you're greek is the way out of this crisis this debt driven crisis austerity can the united states get out of oil a double dip and go back to growth through austerity and will it work the same policy work in europe a lot of people having a lot of doubts about that explicitly the people because they're not being bailed out as we mentioned earlier in the program banks were though. yeah it's come mind boggling to me what on earth the people at the european central bank and the i.m.f. could be thinking in insisting on further austerity because what that does a slow growth i mean it's not as though anyone in the private sector rushes out and says hey great time to invest the government just laid off half its workforce it doesn't work that way no one in their right minds going to us because that what you get in the current situation with austerity is you get further declines and upward and that's what we're seeing in greece and spain and much of europe so how that helps them get out of this debt crisis you know basically they're going to have to write off much of the diaper to clean the case in greece perhaps some of the in the
case of portugal and ireland and then in principle guarantee it that's a step forward and everyone knows that they have to know that these are not that stupid people only i mean that i suppose are not stupid because the way the euro was built this is why it's happening here because if you bail out one country then there is the moral hazard and everybody else will get in line i mean that's the biggest problem with the euro the u.s. has different problems that similar with debt but the euro is just really screwed because you know you bail out greece they did portugal and ireland and italy and who knows who else will line up because if you can fail you're allowed to fail. well i was at the same petersburg economic forum year and a half ago everyone was still talking about the euro replacing the dollar as the reserve currency if there was going to be an altar and what it was ludicrous then. and that was very common of course over the whole last decade that people every time some more oil sheiks said he was going to buy his oil in euros people thought
the dollar was thank you but we see in this crisis that the extent to which the capitalist classes around the world look to the american state as being their guarantor and i must say in that sense the german bundesbank which really is the ethos behind the german central bank has since the one nine hundred seventy s. unlike the fed been extremely irresponsible every time that there is a crisis it acts in a typical bankers' orthodox way and that bankers orthodox way is always to look to the restriction of government spending for fear of inflation because of a banker lends you a dollar and you pay it back in a dollar later that's only worth ninety cents of what it was before the banker isn't making money the bundesbank has that mentality it does not play the role in a capitalist economy a international lender of last resort it never has the fed has put pressure on it for fifty years the change it's mentality and it has and that's the real problem
larry if i got if you can say with the eurozone i mean again the real problem is that it's not really sovereign debt people are worried about at least the powers that be but it's again the banking system they want to make sure that german banks and french banks get paid what they loaned out i mean you can talk about you know a lot of these terrible stories about what's happening to people in the eurozone but everyone's got their eye on the banks to make sure they survive. yes and you know i delivered forty five keynote speeches over the last year and a half about seven in europe and one message i have is very clear take italy for example they've got one point nine trillion of bonds outstanding so that the fourth largest government bond issue or on the planet earth three hundred twenty billion of that debt comes due in the next fifteen months so the point earlier that was made about the policy leaders in austerity being stupid it's not that they're stupid the bottom line is the italian credit default swaps and the yield that they have put the market is requiring italy to pays upwards of about six percent now
five point five percent the in the us the ten year treasury is one point seven five percent so the bottom line is the investors around the world may be italian paper therefore the e.c. not to let me finish but the e.c.b. the president is stepping in they have to buy the bonds so at the end of the day the reason why you need austerity is the people in the north have to support backstop to buy all these bonds and they're just not happy buying taxpayer dollars and they're to buy these bonds through the e.c.b. through the f.s.f. and through these other backstop the syllabus they're just not happy doing that investing all that capital without some a stereo return ok dean i hate when people agree on this program but go ahead. no i don't agree at all ok we are going to quote the opposite there's no issue at all here in the year but the reason why there's a big spread between the interest rates and in a way in the interest rates in the u.s. or germany whichever you like is entirely because that your responsibility
stupidity whatever viciousness whatever word you want to use there for the e.c.b. because if they would stand behind the italian debt then people would accord it the same credibility as the german debt and that's in fact was the case just a couple years ago that the spreads between that italy's debt and germany's there was very very small so basically the fact that that's where it is exploded the easy due to the irresponsibility of the european central bank and the i.m.f. we all jump in go ahead we're going to go he's a good idea is a larger question here there's a larger question here that has increasingly to do with the irrationality of a play now it's driven capitalism and there were people including that of the now who's the guy who's chief economist of citibank with that time was an ellis economist the school economics economist who called for turning the banks and the public utilities the the response we've had through this crisis has been incredibly politically timid it's because there isn't a strong left in europe or the united states and that timidity is showing itself in
the extent to which we're trapped in the irrationalities of a finance driven capitalism banking should be a public utility which would allow for democratic economic planning i know that's heresy if you see it on wall street but it's what a lot of people down there who are protesting really need to be thinking do you think about that larry i mean it's again we keep focusing in on the banks i mean in light of what we just said i mean it's just the way it's the it's the economic financial system we have right now it's come into a dead end and we have to find a new way out. well you know some some smart hedge fund manager i speak to call this the keynesian end point you know it's been going on for a long time but to say that the e.c.b. in this potential this backstop facility that's by buying month to say that they're not by italian paper is not true by tell you in spanish and portugal paper over the last couple of months that the to the tune of sixty five billion over the last
three months so they are supporting that marketplace and i think at the end of the day we saw the fill your lehman brothers create this kind of economic plan to run the world in the in the european union the reason why we're seeing such volatility in the markets today is that it's a much bigger problem than lehman lehman was a largest bankruptcy in history the world corporately six hundred sixty billion but . what's happening in europe is much more serious than it really requires a tarp two like solution some type of big daisy cutter to put this fire out what's the future of the various extortionately said they're going to he wants to he wants to leave open the possibility that sovereigns can fail he's explicitly said that so that leaves open the possibility that they could fail so that's why he's stepped in to buy bonds when the spreads through and to get so out of line because you run the risk that once those spreads do get very large and of course the debt is explosive that's really simple everyone understands and even the people b.c.b.
can figure that one out but if you want to make sure that you don't get a meltdown you have to give some sort of guarantee and that is what's going to happen the only question is how much are spirity they can squeeze out of the greek the italian the spanish and portuguese and irish people before we get to that point . i mean what they are going to god what how much was the. really use i mean how how much at what point will you kill the patient itself go ahead. yeah i mean they are good definitely killing the main generator or growth in europe which is ultimately the german export economy what this all goes back to is that germany and german banks lent money to greek and spanish and portuguese banks to by german exports they then you know when the think tanks were able to continue doing that and what you see in the latest reports this morning is that german manufacturer german manufacturing center sector is going down so yes this is
a vicious circle i'm convinced that the e.c.b. and behind it the fed each of the governments in europe will indeed guarantee these bonds and in that sense guarantee the french and german banks but that is not going to remove the underlying volatility of this finance driven capitalism that's not going in the long run solve this problem will be coming back to it again and again and again it's in demick in the nature of capitalism we have today you know where you find out it's very interesting i was going to get to this point earlier but i mean there has been no real structural change in dealing with these economies in the united states in the particularly the euro zone everyone feeling with the cycles ok trying to control the cycles but not really go in there and structurally change what's you know what's making the problem happen in the first place everyone says delaying it delaying it the numbers get bigger and bigger and bigger well i say you absolutely have to start going to downsize finance go ahead larry.
well you know this problem's been brewing for twenty five years i mean there's no question the governments in the east and particularly the west have been growing bigger and bigger and bigger relative to g.d.p. they've been many books including mine that address this and now this is the classic he leveraging process that has to take place because at the end of the day you have to have bondholders that are would that are willing to take the risk on this paper and as long as these eels keep going up you look at germany's five year credit default swaps both through the two thousand and eight watts i mean that's a startling statement i mean this is the credit the balts walk on german debt so it's a bad on germany's solvency so you have a situation where even even with germany which is one of the largest governments in the world opinion same thing credit fault swap so through the wise have got the bond buyers around the world are stepping back and governments have to do something
to fix themselves well gentlemen on that gloomy note we end our program many thanks to my guest today in washington and in new york if they sort of you are still watching us here are to see you next time remember prospal. ok. you know sometimes you see a story and it seems so you think you understand it and then you glimpse something else you hear or see some other part of it and realize that everything you thought you knew going to. charge was a big check.